Inequality – Plight to Economic Growth

While developing and under-developed countries are struggling to meet the targeted economic growth and lower the inequality index, the developed nations are also affected by rising inequality.

--By Samrat Bista

Rising inequality has been one of the major obstacles faced by developed as well as developing and under-developed countries across the world. Rising inequality degrades the economic growth. While developing and under-developed countries are struggling to meet the targeted economic growth and lower the inequality index, the developed nations are also affected by rising inequality. According to the OECD, rising inequality is estimated to knock more than six points off the cumulative growth in Italy, the United Kingdom and the United States. It is still miserable that the richest 10% of the population earning rate is 10 times more than the poorest 10% population.

The biggest impact on growth undoubtedly is the widening gap between the lower middle class and poor households compared to the rest of the society. There are rich and poor households in every society but, as a matter of fact, the earning rates of the families are tremendously different. The reasons are access to the resources and availability of means like skills and capital. The other factors are ineffectiveness of redistributive policies such as taxes, social benefits and anti-poverty missions.

Unemployment and under-employment are other issues which we have seen growing. As said earlier, the reasons are the same; unavailability of means like skills and right opportunities. This has contributed to growing inequality. In the least developed and developing nations where unequal distribution of resources and opportunities is found, the rising unemployment rate is directly correlated to rising inequality. Weakness in policy formulation or implementation, existence of different forms of corruption and unequal and discriminated opportunities are clearly increasing the gap. There is a large population still untapped by policies and programmes. And in many cases, both the policy makers and the population are unaware of such social injustice. Access to resources is limited. Resources are either unidentified or limited to a small group of people. With some resources being traditionally used by local people, the mass is still unaware about their commercial use. Lack of capital is another issue. People may acquire certain skills through tradition, but commercial use of such skills is not possible unless these people have capital. With limited employment opportunities and sluggish development of industrial enterprises, the income level of those at the bottom of the pyramid seems to deteriorate even further.

Though the richer population – those at the top of the pyramid - has seen particular gains, the income of those at the bottom is growing at much slower pace. And it falls during economic downturns. The bottom of the pyramid is always highly vulnerable to economic downturns. The poverty level thus increases and has significant effect on the overall economy. The major factor for inequality is the gap between the poor households and the rest of the population. Ineffectiveness of the productivity of a large portion of human capital which forms the bottom has a great impact on the growth rate. Inequality undermines education opportunities, opportunities to the underprivileged and social security including mobility.

Gini Index is measure of the degree of inequality in distribution of family incomes in a country. The Gini Index of Nepal at present is 32.8. This was 30.1 in 1985 and highest during 2002-2006 at around 42. The income share held by highest 10% as per World Bank Report in 2011 is around 27% which was 25 % in 1985. It scaled up to 39.5 in 2011. The poorest 10% share only 1.5% of the total national income. This was 4% in 1985. If we consider this data area wise, the indicators of the rural areas are much higher than those of the urban areas. The development index of rural areas is half of that of the urban areas. The increase in vertical gap is one of the major barriers to economic growth.

The most effective measures to reverse inequality are education, skill development and effective policies to safeguard social security and enhance access to resources and capital. Access to financial services among the people should be made easier. Financial inclusion has been much talked about but less practiced in Nepal. The policies should seek to promote the economy without leaving behind the poor population. Rather than distributing cash, mid-term social investment should be emphasized by increasing skill-oriented education, job opportunities, health and security, commercialization of ethnic and traditional skills and development of market and mobility of goods and human resources. The most direct policy can be properly targeted at redistribution through taxes and benefits. The top of the pyramid should also take responsibility and develop social entrepreneurship and create value to society as a whole.

The present state of development of Nepal that perpetuates inequality is not sustainable and not right. If the major portion of the population comprising more than 80% of the people including poor households and lower middle class income group is left behind, then we cannot even imagine a prosperous and peaceful society. It also shows that we are devaluing our human resources and have failed to ensure social justice.

The writer is a Chartered Accountant at CR & Associates and can be reached at samratbista@gmail.com

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